Buy and Sell Stocks

Key Fundamentals: Sales, Margins, Return On Equity

Sales growth, profit margins and return on equity are
vitally important in evaluating a company's health.
This lesson explains the significance of these financial
gauges and how to identify the companies with best numbers.

It All Starts With Sales

Sales figures are a key measure of a company's strength
-- or lack of it. Perhaps no other piece of financial
information reflects growth better than sales: the money
that comes into a company from products sold or services
rendered. If a company is run efficiently, sales growth
essentially drives earnings growth. Companies basically
have two ways to increase earnings. They either increase
sales, reduce expenses or ideally do both. Although
a well-managed company controls expenses, healthy sales
are the main engine for growth.

Nokia

Nokia began a 630% jump from March 1998 through
December 1999 and continued rising into 2000
after the wireless-phone maker reported
sales gains of 9%, 12% and 19% in the three
quarters leading up to the big move. Earnings
were rising sharply during this period, too.

When you search for the best stocks, you want a company
to have strong sales growth to support its earnings
growth. Think of sales growth as the foundation under
your house: if it is loose, it's not as stable as one
with all the structural elements in place. When you
see a company increasing its sales, it's telling you
its business is drawing larger demand and is structurally
sound and prepared to expand and generate the earnings
capable of boosting its stock price.

Demand is driven by a number of factors, including
larger numbers of customers, customers increasing their
purchase volume, introduction of new products, expansion
into new markets and the improvement of existing products.

The top-performing companies show consistent double-
or triple-digit sales growth. It's even better when
the percentage growth rate increases quarter after quarter.
Such acceleration is the hallmark of quality growth
companies. They reflect a well-managed organization.
Take a look at some companies that have done just that:

Your Stock Buying Checklist — A Review

step-by-step guide to finding stocks with the characteristics
that make them market winners. This lesson reviews stock
buying concepts presented in this course.

Investor's Business Daily's Key Buy Rules

#1. Top Fundamentals

Concentrate your buys in the No. 1 company within its
particular industry in terms of sales and earnings growth,
profit margins, return on equity (ROE) and relative
price performance. A leader should have the characteristics
shared by the best stocks before they made their major
price moves:

At least a 25% increase in the most recent quarter's
earnings per share (EPS) vs. the same period in the
year earlier.

Ideally, accelerating earnings growth in the three
most recent quarters.

At least a 25% increase in annual EPS in each of
the past three years.

The most profitable companies have Earnings Per
Share Ratings of at least 80 or 85.

Sales growth should be up at least 25% in the most
recent quarter, or accelerating over the past few
quarters, or both.

The most profitable companies tend to have annual
ROE of 17% or higher.

Pretax and after-tax margins should be improving
and near their historic peak.

Stocks should have Sales+Margins+ROE (SMR™)
Ratings of A or B, which means they are in the top
20% or top 40% of stocks, respectively, in terms of
sales growth, profit margins and ROE.

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